Qatar Petroleum and Exxon Mobil (XOM US) have taken a positive final investment decision (FID) on the Golden Pass LNG export facility on the US Gulf Coast, one of 25 projects up for FID this year globally. Golden Pass awarded the engineering, procurement and construction (EPC) contracts for the project to a joint venture of Chiyoda Corp (6366 JP), Mcdermott Intl (MDR US) and Zachry Group, with the project expected to cost US$10bn and come on line in 2024. We discuss the company impacts, the project detail and market impacts
Consolidated sales were up 4.1% year-on-year in the three months to December, supported by demand from the medical, semiconductor and factory automation sectors, to which sales were up 8.7%, 11.0% and 8.2%, respectively. Gross profit was up 4.5%, but higher S,G&A expenses resulted in a 1.8% decline in operating profit (the operating margin was, however, up from the previous quarter). Net profit was up 4.9% after a decline in extraordinary losses. It was a relatively good performance in view of the cyclical downturns in the semiconductor and factory automation markets, and medical sales growth of only 3.2% in FY Sep-18.
Management’s three-year plan calls for 4.2% growth in sales and 0.9% growth in operating profit this fiscal year, followed by acceleration in FY Sep-20 and FY Sep-21. This is predicated on investment in new production capacity, which should be largely completed over the coming year, sufficient demand to absorb that capacity, and depreciation leveling off in FY Sep-21. Sales growth was on target in 1Q while operating profit fell short, but management has a record of cutting R&D and other expenses in order to achieve profit guidance.
At ¥3,985, the shares are selling at 29x management’s implied EPS estimate for this fiscal year (net profit guidance/ current shares outstanding), 26x next year’s estimate and 22x the estimate for FY Sep-21.
We chose to study Infrastructure Leasing & Financial Services Ltd (ILFS)’s default case. The company is engaged in infrastructure development and financing activities in India. Since the start of June 2018, the company has defaulted on a series of payments, resulting in rating downgrades. More recently, in January 2019, ILFS’ affiliated company Jharkhand Road Projects Implementation Company failed to pay INR760m due to its lenders. This resulted in CRISIL downgrading the bonds to D, which amounts to junk status. ILFS is one of the most important companies in the Indian infrastructure space and this default indicates signs of worry for investors.
LG Corp’s 4 listed major subs take up 90% of its holdings. This makes these 4 subs a suitable candidate for a synthetic sub. I synthesize them based on their respective value % in the holdings with their sum as 100%: LG Chem (40.74%), LG H&H (31.36%), LG Elec (16.95%) and LG Uplus (10.96%).
On a time horizon of 120 days, the Holdco/Synthetic Sub price ratio is currently at the widest gap in favor of Holdco. On a 20D MA, Holdco is now above +1σ. The prices began to diverge since early last month mainly due to LG Uplus’ nearly 20% price loss.
We are now seeing some recovery signals on Korea’s local telcos. It is unlikely that LG Uplus will continue this radical price divergence. I expect to see a mean reversion on the LG Holdo/Synthetic Sub price ratio at this point. I’d aim at -0.5σ for a 3.7~4% yield. For the sake of hedge, I’d trade the entire synthetic sub at the ratio of 40:30:18:12 rather than LG Uplus alone.
A bit over a week ago Klaus-Michael Kühne – chairman of the eponymous freight forwarding major Kuehne + Nagel International A (KNIN VX) showed up in the Handelszeitung newspaper saying that he/Kuehne+Nagel had no interest in Panalpina as it was “hopelessly overvalued” and the company did not want to either overpay, or undertake a “megafusion” (large M&A) because of the difficulty in integrating companies.
This was more than a little confusing.
Less than a week after Panalpina Welttransport Holding (PWTN SW) had changed its mind about the validity of its corporate governance structure (asserted when three of the major shareholders had questioned it) and on 19 November issued a press release saying Peter Ulber would not stand for re-election at next May’s AGM, Swiss newspaper Finanz und Wirtschaft carried an interview with K&N CEO Detlef Trefzger, who said they were interested in pursuing tie-up talks. One investment bank – which has for years issued a list of likely takeover stocks in the sector – noted in response that K&N was on the lookout for transformational M&A.
Furthermore, K&N seemed like a decent fit. K&N is larger, but it needs scale in its weakest segment, which is Asian air cargo forwarding. Interestingly enough, that happens to be Panalpina’s strong point – that’s where it gets almost all of its OP. With K&N efficiency in Europe, and Panalpina branding and efficiency in Asia, it is a pretty great fit.
But Klaus-Michael Kühne indirectly controls 53% of K&N so one should take his opinion about the company quite seriously. So that left the DSV bid, which was in limbo. And the shares continued to trade above the €170/share proposed offer.
The New News
This morning, Panalpina offered a press release saying…
Panalpina confirms that the Ernst Göhner Foundation, Panalpina’s largest shareholder representing approximately 46% of the total share capital, informed the Board of Directors that it does not support the current non-binding proposal from DSV and that it supports Panalpina’s Board of Directors in pursuing an independent growth strategy that includes M&A.
According to its fiduciary duties the Board of Directors of Panalpina continues to carefully review the situation with its professional advisers. Further announcements will be made as appropriate.
The stock is down 7+% this morning, but is trading only 3% below DSV’s indicative offer, and 20.5% above where the stock was trading in mid-January before DSV’s indicative non-binding proposal.
This doesn’t mean that there will be no deal, but it does mean there will be a lull unless someone else comes up with a more aggressive.
At some point and some price, the fiduciary duty of the directors would almost certainly have to be “we should sell here.” It is obvious from this statement that for the Ernst Göhner Foundation, that price is higher, and perhaps materially higher. If management wants to remain entrenched, and the Ernst Göhner Foundation is happy to entrench them, it may not matter what the directors would recommend because the Foundation would not need to sell the stake they have owned for almost 50 years.
The other info public today suggests this is perhaps an issue with non-economic inputs. And those are the toughest to fight against.
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We chose to study Infrastructure Leasing & Financial Services Ltd (ILFS)’s default case. The company is engaged in infrastructure development and financing activities in India. Since the start of June 2018, the company has defaulted on a series of payments, resulting in rating downgrades. More recently, in January 2019, ILFS’ affiliated company Jharkhand Road Projects Implementation Company failed to pay INR760m due to its lenders. This resulted in CRISIL downgrading the bonds to D, which amounts to junk status. ILFS is one of the most important companies in the Indian infrastructure space and this default indicates signs of worry for investors.
LG Corp’s 4 listed major subs take up 90% of its holdings. This makes these 4 subs a suitable candidate for a synthetic sub. I synthesize them based on their respective value % in the holdings with their sum as 100%: LG Chem (40.74%), LG H&H (31.36%), LG Elec (16.95%) and LG Uplus (10.96%).
On a time horizon of 120 days, the Holdco/Synthetic Sub price ratio is currently at the widest gap in favor of Holdco. On a 20D MA, Holdco is now above +1σ. The prices began to diverge since early last month mainly due to LG Uplus’ nearly 20% price loss.
We are now seeing some recovery signals on Korea’s local telcos. It is unlikely that LG Uplus will continue this radical price divergence. I expect to see a mean reversion on the LG Holdo/Synthetic Sub price ratio at this point. I’d aim at -0.5σ for a 3.7~4% yield. For the sake of hedge, I’d trade the entire synthetic sub at the ratio of 40:30:18:12 rather than LG Uplus alone.
A bit over a week ago Klaus-Michael Kühne – chairman of the eponymous freight forwarding major Kuehne + Nagel International A (KNIN VX) showed up in the Handelszeitung newspaper saying that he/Kuehne+Nagel had no interest in Panalpina as it was “hopelessly overvalued” and the company did not want to either overpay, or undertake a “megafusion” (large M&A) because of the difficulty in integrating companies.
This was more than a little confusing.
Less than a week after Panalpina Welttransport Holding (PWTN SW) had changed its mind about the validity of its corporate governance structure (asserted when three of the major shareholders had questioned it) and on 19 November issued a press release saying Peter Ulber would not stand for re-election at next May’s AGM, Swiss newspaper Finanz und Wirtschaft carried an interview with K&N CEO Detlef Trefzger, who said they were interested in pursuing tie-up talks. One investment bank – which has for years issued a list of likely takeover stocks in the sector – noted in response that K&N was on the lookout for transformational M&A.
Furthermore, K&N seemed like a decent fit. K&N is larger, but it needs scale in its weakest segment, which is Asian air cargo forwarding. Interestingly enough, that happens to be Panalpina’s strong point – that’s where it gets almost all of its OP. With K&N efficiency in Europe, and Panalpina branding and efficiency in Asia, it is a pretty great fit.
But Klaus-Michael Kühne indirectly controls 53% of K&N so one should take his opinion about the company quite seriously. So that left the DSV bid, which was in limbo. And the shares continued to trade above the €170/share proposed offer.
The New News
This morning, Panalpina offered a press release saying…
Panalpina confirms that the Ernst Göhner Foundation, Panalpina’s largest shareholder representing approximately 46% of the total share capital, informed the Board of Directors that it does not support the current non-binding proposal from DSV and that it supports Panalpina’s Board of Directors in pursuing an independent growth strategy that includes M&A.
According to its fiduciary duties the Board of Directors of Panalpina continues to carefully review the situation with its professional advisers. Further announcements will be made as appropriate.
The stock is down 7+% this morning, but is trading only 3% below DSV’s indicative offer, and 20.5% above where the stock was trading in mid-January before DSV’s indicative non-binding proposal.
This doesn’t mean that there will be no deal, but it does mean there will be a lull unless someone else comes up with a more aggressive.
At some point and some price, the fiduciary duty of the directors would almost certainly have to be “we should sell here.” It is obvious from this statement that for the Ernst Göhner Foundation, that price is higher, and perhaps materially higher. If management wants to remain entrenched, and the Ernst Göhner Foundation is happy to entrench them, it may not matter what the directors would recommend because the Foundation would not need to sell the stake they have owned for almost 50 years.
The other info public today suggests this is perhaps an issue with non-economic inputs. And those are the toughest to fight against.
In this version of the GER weekly research wrap, we dig into the debt tender for Softbank Group (9984 JP) and assess the merger between TPG Telecom Ltd (TPM AU) and VHA. On the IPO front, we initiate on CStone Pharma (CSTONE HK) while we update on Ebang (EBANG HK) . Finally, we dig into the beat at Facebook Inc A (FB US) and assess whether there are further legs for the investment case. We also provide a list of upcoming catalysts for upcoming event-driven ideas.
More details can be found below.
Best of luck for the new week – Rickin, Venkat and Arun
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We look at the main topics of interest that came out of the results so far and what this means for the oil and gas sector. The areas in focus were the strong cash flow generation and capex plans, reserve replacement, new LNG projects, IMO impact for the refining sector and digitalisation. The upstream areas that got the most focus were the US onshore (specifically the Permian), US Gulf of Mexico, Guyana, Brazil and Venezuela. This follows on from our note 2019 Energy Market Themes & Stocks with Exposure: Focus on Oil, Refining, LNG, M&A & Renewables.
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In this version of the GER weekly research wrap, we dig into the debt tender for Softbank Group (9984 JP) and assess the merger between TPG Telecom Ltd (TPM AU) and VHA. On the IPO front, we initiate on CStone Pharma (CSTONE HK) while we update on Ebang (EBANG HK) . Finally, we dig into the beat at Facebook Inc A (FB US) and assess whether there are further legs for the investment case. We also provide a list of upcoming catalysts for upcoming event-driven ideas.
More details can be found below.
Best of luck for the new week – Rickin, Venkat and Arun
We look at the main topics of interest that came out of the results so far and what this means for the oil and gas sector. The areas in focus were the strong cash flow generation and capex plans, reserve replacement, new LNG projects, IMO impact for the refining sector and digitalisation. The upstream areas that got the most focus were the US onshore (specifically the Permian), US Gulf of Mexico, Guyana, Brazil and Venezuela. This follows on from our note 2019 Energy Market Themes & Stocks with Exposure: Focus on Oil, Refining, LNG, M&A & Renewables.
Campbell Gunn tackled Toppan, whose market capitalisation has grown by only 2% per annum or just ¥34b since December 2013. From the recent peak in June 2017, Toppan shares have underperformed the market by 27% and, for the last year, have been at their most extreme value relative to TOPIX over the previous thirty years.
Toppan’s investment portfolio (341 companies with an aggregate market value as of the last quarter of ¥498bn) has grown at a 39.1% compound annual growth rate (CAGR) over the last five years, outperforming Toppan’s core operations (6.4% CAGR) and the overall stock market (7.5% CAGR). The economic reality for Toppan is that the company’s investment business has far surpassed the core business in terms of ‘margins’ and contribution to Net Assets.
The company has become more (relatively speaking) proactive in managing equity risk, and recently sold 10.5m shares in Recruit Holdings (6098 JP)(its largest investment holding) for approximately ¥31.5b, reducing Toppan’s holding in Japan’s leading listing employment services business from 6.57% to 6.05%. With this sale, Toppan’s liquid assets will now exceed US$3b or 58% of the current market capitalisation.
Toppan’s business and investment portfolio should be radically pruned or eliminated. Such a transformation probably requires a change of management, the presence of an activist investor, or both. The latter is the more likely outcome.
HHIC mainly comprises its own shipbuilding/marine plant business (75% of GAV) and 80.54% in Samho Heavy stake (15% of GAV), both unlisted. Samho Heavy owns a 42.40% stake in Hyundai Mipo Dockyard (010620 KS). HHIC announced it will split-off (no new shares issues) with the surviving company an intermediate holdco (same ticker, 009540) and new opco (unlisted) holding Samho Heavy and the in-house shipbuilding/marine plant business.
Next, DSME undertakes its own rights offer (39.9% of DSME’s shares), via a third party allocation to intermediate Holdco with a target value of ₩1.5tn, in an all cash deal. The intermediate holdco will ultimately hold a 68.3% stake in DSME. DSME will remain a listed company therefore no tender offer to the remaining shareholders is expected, according to Sanghyun Park. Details are not finalised and further information is expected on the 8 March.
Netmarble Games (251270 KS)officially announced it is interested in buying Nexon/NXC Corp. At this point, it appears that a higher probability scenario is for Tencent Holdings (700 HK) to form a consortium with either Netmarble Games or Kakao Corp (035720 KS) in bidding for Nexon/NXC Corp. Douglas’ justification for this are:
To avoid the cultural backlash from Korean gamers.
Tencent is a minority investor of both Netmarble Games and Kakao. Tencent’s 17.7% stake in Netmarble Games is worth ₩1.6tn. Tencent’s 6.7% stake in Kakao which is worth ₩0.6tn.
Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon.
Relationship problems started in 2013 when Itochu Corp (8001 JP) was pushed out of the leadership spot in Descente without any warning or even any face-saving honorary role for its outgoing leader. This was hostile and the frictions were laid bare for anyone who cared to see them. They got worse when Itochu bought shares last summer without telling Descente. They got even worse when Descente signed a deal which would effectively end in a merger with Wacoal without telling Itochu. So it should have been less of a surprise than it appeared when Itochu announced this past Thursday it would launch a Partial Tender Offer for 9.56% of the shares outstanding of Descente.
Itochu’s Partial Tender is interesting, and there is a trade here if enough people are sceptical of Descente’s ability to play hardball. It is, however, not particularly cheap, and the shares were below ¥2,000/share last Wednesday for a reason.
Because Itochu is putting itself in a place to not be able to win (i.e. not control the board post-tender, also knowing that Descente could dilute them at will), this is an invitation by Itochu to minority shareholders to make their opinions known, for the media and commentators to do so too, and for someone else to come in over the top.
Travis Lundy thinks this goes to close to ¥2800 – and did close at ¥2,771 on Friday – because of expectations that Descente will find a white knight to pay more or that the family could launch an MBO. Anybody who wants Descente doesn’t want it for its Japan business. So paying a higher price than someone who wants to expand aggressively in China to allow entrenched management to not expand aggressively in China requires deeper pockets or a lot more patience.
Healthscope has announced it has entered into an Implementation Deed with Brookfield, under which Brookfield seeks to acquire 100% of Healthscope by way of a scheme at A$2.50/share, and a simultaneous Off-market takeover Offer at $2.40/share, both inclusive of an interim dividend of $.035/share. The considerations under these proposals compare to the earlier indicative considerations of $2.585/share and $2.455/share respectively under the unsolicited conditional proposals announced back in November.
HSO also announced that the BGH-led consortium, which holds a ~20% stake, said it could improve the terms of its previous offer of $2.36/share, provided it was given access to Healthscope’s data room.
The 3.3% and 2.2% step down in Consideration under the Scheme and Off-market Offer compared to the earlier proposals underscores the uneasy backdrop to this Offer on account of various operational issues faced by Healthscope. It also underlines the fact that even provided due diligence, there can be no guarantee the BGH-led consortium will bump its initial bid.
Shares are trading at a punchy $2.45/share, facing either the Scheme proposal or the possibility the BGH ups its offer, with or without due diligence. This is a mid-single-digits annualized return which assumes that either BGH will up, or will take the Scheme rather than see whether the Off-Market Takeover gets done. This is okay, but not great. I’d look to enter closer to the Off-market consideration level.
On 26 October Hitachi Ltd (6501 JP)and Faurecia (EO FP)announced that Faurecia would take over Hitachi car audio and infotainment equipment subsidiary in Clarion a tender offer to be launched 3+ months hence. Clarion has now announced a forecast revision for the fiscal year to 31 March 2019 which involves a shortfall in revenue of 9.1%, a 16.7% drop in forecast Operating Profit, and a drop in Net Profit from ¥1.7bn to a loss of ¥500mn (a ¥2.2bn swing); fortunately Faurecia also announced it will go through with the deal with no changes (other than to extend the Tender Offer to 21 business days).
This deal is quite straightforward. The deal is on schedule and coming through as planned.
Travis expects this deal will end up with Faurecia owning over 90% and there will be a Demand For Shares as allowed to Special Controlling Shareholders (under Article 179, Paragraph 1 of the Companies Act) allowing them to force out minorities, potentially by the 3rd week of March 2019.
At the current close of ¥2,496, it is offering <2% annualized return for slightly more than one-month of cash usage, and negligible risk this deal doesn’t go through. Tight, but to be expected.
Thirty minutes after Eclipx guided down its FY19 NPATA figure, Mcmillan Shakespeare (MMS AU)announced that the first court meeting to be held on the 1st February – which would consider the Scheme documents that are sent to ECX shareholders – will be rescheduled. No new date was announced.
Taken purely on the guidance downgrade and the MAC’s described in the SIA, on balance, this deal still looks good to go. I don’t see a MAC being triggered here.
But this new development could/should also be viewed in conjunction with the large step down in NPATA guidance for FY18 (announced on the 6 August 2018, and resulted in the large decline as seen in the chart below), where FY18 NPATA was guidance was reduced to A$77-$80mn (13-17% growth ) versus prior guidance of 27-30% growth. Perhaps MMS want ECX to come out and say their forecast for annual NPATA is down 10%.
Still, at a 15% gross spread to terms and trading ~5% above its undisturbed price, prior to Sg Fleet (SGF AU)‘s August proposal – while ECX’s peer group is down 17% on average since SGF’s tilt – the negative news surrounding the NPATA guidance and the MACs appears fully priced in.
The deal is done. Shareholders approved the deal. Given where book value and market prices were on the day before the revised plan was announced on 7 December, Travis expects a spirited appraisal rights process.
For those who are now looking at this as an arb situation, the return is quite decent if you buy on the bid and can get multiples of leverage and keep them after the shares have been delisted, while waiting for payment. If you can get multiples of leverage only while the shares are listed, it is still pretty OK. If you are an arb with no leverage, this is still OK for a Japanese deal.
SCSK announced a Tender Offer to buy out minorities in Veriserve, in which it holds 55.59% of voting rights. The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price. The price does not seem egregiously unfair, but for investors who own it who think it has another double in it this year they might get upset. And the lack of good process here deserves attention.
The lack of imagining a competing bid is not good governance. The lack of looking for one is not either. The lack of true fairness opinion is also not good governance.
Still, it is at a 14+year high. It is a small cap. Not that many people will care. It is not cheap on a PER basis and not really inexpensive on an EV/EBITDA basis.
There IS a chance, theoretically, that this does not go through. SCSK doesn’t have a super-majority, and if it does not get 11.1% of the shares outstanding, it will not be able to automatically squeeze out minorities. But Travis does not think it will be particularly difficult to get there.
Sumitomo Corp (8053 JP) consolidated subsidiary SCSK Corp (9719 JP) announced a Tender Offer to buy out minorities in JIEC at ¥2,750/share, in which it has 69.52% of voting rights. This deal is a worthwhile example of some of the weaknesses in the execution of the current Corporate Governance Code and the “fairness” of M&A in Japan.
The lack of a competing bid and true fairness opinion are not good governance. The fact that the bid is 1.4% above the bottom of the Target’s own Advisor’s fair value DCF valuation range while the top of the range is 61.3% higher is disappointing.
But what are you gonna do? SCSK has a super-majority. The stock is super-duper illiquid. The Offer is a 31% premium to the highest price ever paid for the stock. There is no minimum to the tender so it will be “successful” if no one tenders.
So you suck it up and buy and tender, or tender what you own. And then you write a public comment to the METI Fair M&A process.
Mastercard Inc Class A (MA US) has made a £233mn Offer (£0.33/share) to take over cross-border payments firm Earthport, trumpingVisa Inc Class A Shares (V US)‘s offer late December by 10%. The Offer is conditional on 75% of EPO’s shareholders accepting with 13.08% of shares outstanding in the bag. EPO’s shares increased to £0.282 following Visa’s offer, but currently trade at £0.37.50, ~14% above the latest offer, suggesting a higher bid is likely, or at least expected.
For EPO shareholders, who watched their shares erase 70% of their value over the last 2 years and trade around £0.05 earlier this month, this is a fantastic result. Mastercard’s bid also comes at a 65% premium to the placement at £0.20/share on 4 October 2017.
A (significantly) higher offer price is plausible. EPO can be seen as a disruptor to these card giants. Instantaneous bank-to-bank transfers and the increase in mobile payments are a threat to their traditional business models as they eliminate payment cards from the transaction loop. Both Visa and Mastercard have deep pockets and EPO would help both Visa and Mastercard expand their product offering.
There is no clear or discernible pricing methodology to exact where a bidding war will send the share price. But it could get (unsurprisingly) crazier from here. I think a £0.40/share offer is not unreasonable or out of the question, and is a level where shares often found support for a year and half back in 2014 and 2015.
CMA CGM SA (144898Z FP)has published its prospectus for what is evidently a heavily orchestrated Public Tender Offer for CEVA. Ceva’s Board has concluded that offer is fair & reasonable but does not recommend shareholders tender. CMA CGM added that “the recommendation to shareholders from the CEVA board not to tender shares in exchange for cash is done in perfect agreement with CMA CGM“.
CMA CGM currently holds 50.6% of CEVA, via a 33% direct stake with the remainder in derivatives. After a 10-trading day cooling off period, the offer will be open for acceptances between February 12 to March 12, unless extended. It is the intention of CMA CGM to maintain CEVA’s listing.
For the month of January, seventeen new deals were discussed on Smartkarma with an overall deal size of US$91bn. This number does not include rumours on Nexon Gt Co Ltd (041140 KS) and Capitaland Ltd (CAPL SP)‘s acquisition of Ascendas-Singbridge. The average transaction premium was 43%, or 26% if ignoring Earthport plc (EPO LN)‘s offer. This insight provides a summary of ongoing M&A situations and a recap of news associated with each event situation in January.
HOC initially targeted an IPO in 2018 with an expected market cap and an enterprise value of ~₩8tn and ₩10tn respectively, as discussed by Sanghyun in an earlier insight (Hyundai Oilbank IPO Update: Timeline & Valuation). The IPO was postponed after the regulator picked over the balance sheet; and probably just as well, as falling refining margins resulted in HOC’s operating profit declining 42% to ₩661bn last year. The sale to Aramco is expected to push the IPO back to later this year.
Prior to Aramco’s involvement, HHI was (and effectively is) a weakish stub with the 31% stake in HHIC accounting for just 32%/26% of NAV/GAV; the unlisted operations and the future earnings of those investments were more critical to understanding HHI’s valuation. This investment by Aramco quantifies the valuation for the majority (~95%) of HHI’s unlisted investments, reinforcing the already somewhat prevalent view that HHI’s discount to NAV was excessively wide.
But HHI/HHIC weren’t done yet. Just when the NAV was expected to narrow further – especially as additional newsflow filters in on the outcome of the board meetings, the expected timeline to completion, and the possibility of HOC’s IPO later this year – HHIC announced a split-off, a PIK and rights issue. Please refer to this development in the “Events” section above.
The U.S. Treasury (OFAC) has lifted sanctions imposed on En+ Group plc, UC Rusal plc, and JSC EuroSibEnergo. The key to lifting these sanctions was Oleg Deripaska reducing his direct and indirect shareholding stake in these companies and severing his control. All sanctions on Deripaska continue in force.
Rusal announced that En+ had entered into a securities exchange agreement with Glencore, pursuant to which Glencore shall transfer 8.75% of Rusal’s shares to En+ in consideration for En+ issuing new GDRs to Glencore representing approximately 10.55% of the enlarged share capital of En+.
The transfer will be done in two stages: 2% to be transferred following the removal of Rusal and EN+ from the SDN list; and 6.75% 12 months later. This two-stage process appears geared to circumvent a mandatory takeover by En+. Hong Kong employs a “creeper” speed limit, where shareholders (holding between 30-50%) can creep their shareholding upwards by 2% in a 12-month period (Rule 26.1 (c)).
As an aside, after sanctions were lifted, En+ announced seven new directors, including Christopher Bancroft Burnham, who served as Under Secretary-General for Management of the United Nations (alongside John Bolton, Trump’s current national security adviser). Burnham was also on Trump’s Presidential Transition Team
Rusal’s NAV discount has narrowed to 68.5% from 71% the previous Friday. This compares to the 45-50% discount range prior to the sanctions being imposed. This should narrow further.
I issued a month-end share class summary, a companion insight to Travis’ H/A Spread & Southbound Monitors and Ke Yan‘s HK Connect Discovery Weeklies. This share class monitor provides a snapshot of the premium/discounts for 215 share classifications (ADRs, Koran prefs, Dual-class, Thai foreign/local Thai) around the region.
The average premium/discount for each set over a one-year period is graphed below.
By Travis’ calcs, there was something on the order of ¥630-650bn of shares of several names to buy on the close this past Wednesday. There was also, therefore, something like ¥630-650bn of TOPIX and JPX Nikkei 400 (almost all TOPIX) to sell on the close of Wednesday.
Softbank Corp (9434 JP) was expected to see total buying of ¥340bn or so; and Takeda Pharmaceutical (4502 JP)buying of ¥260-280bn at the close. (Both names did trade a very large amount off-market.) A number of other names see TOPIX inclusions because of them listing on TSE1 in December or because of share count increasing because of merger (like LIFULL (2120 JP)) or because of offerings.
A VERY significant amount of both names were purchased in “guaranteed close” trades where indexers actually paid close-plus pricing until the very end of the day because of fears that the actual market might not close. This meant that on-market volume for Takeda and Softbank was a fraction of what might be expected. The risk was transferred but to get in the flow you had to trade off-market.
The Centuria Capital (CNI AU) resolution has passed. This resolution was not a vote to decide on tendering the shares held by CNI in Propertylink Group (PLG AU) into ESR’s offer; but to give CNI’s board the authorisation to tender (or not to tender) those PLG shares.
Minebea Co Ltd (6479 JP)announced that it had received all relevant anti-trust approvals but would not start the Tender Offer for U Shin Ltd (6985 JP) until the start of February (the original announcement had said the Tender would commence at the end of January).
The interesting path of the Mobius strip of connections that is the HCN continues: China Goldjoy (1282 HK)‘s chairman Yao Jianhui (& others) have pledged 12.14% of China Goldjoy to Huarong Investments (2277HK). Goldjoy is the Offeror for New Sports Group (299 HK).
CCASS
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
Keyence reported higher sales and profits but lower rates of growth in the three month to December. Consolidated sales were up 11.8% year-on-year compared with 15.2% growth in 2Q and 19.7% growth in 1Q. Operating profit was up 9.1% compared with 12.7% growth in 2Q and 21.2% growth in 1Q. The operating margin declined to 53.8% compared with 55.2% in 2Q, 54.6% in 1Q and 56.6% in 4Q of FY Mar-18.
Once again, the results at Keyence were much better than those at other factory automation related companies – notably Fanuc (6954 JP) and Omron (6645 JP), where operating profits dropped at double-digit rates. But Keyence is geared to incremental improvements rather than large capital outlays, and to customers’ R&D spending, and it has a diversified base of user industries. On the other hand, it is not immune to weakening demand in China, Europe and elsewhere.
Since hitting a 52-week low of ¥50, 780 on October 26, Keyence has rebounded by 13%. At ¥57,270, the shares are now selling at 30x our EPS estimate for this fiscal year and 27x our estimate for FY Mar-20. Their 5-year historical P/E range is 18x – 42x. Other valuations are also well up in their historical ranges.
The sales and profit data suggest difficult year-on-year comparisons for the next few quarters.
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Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.
Happy Lunar New Year to everyone from Aequitas Research!
It has been a fairly quiet week leading up to Chinese New Year but it is not stopping Maoyan Entertainment (1896 HK) from listing on Monday. The IPO was priced at the bottom end of its offering range. The last we checked, it traded up 3% in the grey market on Friday. Ke Yan, CFA, FRM will follow up with a short note of his thoughts on post-IPO trading dynamics and bookbuild subscription levels.
Other updates on IPO in Hong Kong include Sinochem Energy allowing its IPO application to lapse while Koolearn (1373356D HK) and Shangde Qizhi Education re-filed for IPO. Edvantage, another new education IPO (and likely to be borderline US$100m deal size) filed for Hong Kong listing this week as well.
China Tower (788 HK)‘s lock-up will be expiring on the 8th of February and Ke Yan, CFA, FRM mentioned in his insight that any potential placement will be a good opportunity to accumulate the stock. Placements from cornerstone investors will likely be a liquidity event.
In India, Chalet Hotels Limited (CHALET IN) closed its bookbuild with a tepid overall demand of 1.57x. The silver lining for the IPO is that the institutional tranche saw a healthy 4.6x demand, similar to that of Lemon Tree Hotels (LEMONTRE IN) in terms of weak overall but strong institutional demand, which ended up performing well in its IPO.
Other upcoming India IPOs include Mazagon Dock Shipbuilders Ltd (9155507Z IN) and Embassy REIT which were said to be seeking listing towards the end of February. Sterling and Wilson is also looking to file its INR50bn IPO with the Sebi soon.
In Japan, Wingarc1st announced its IPO bookbuild to start on the 25th of February and will be listing in March. It is estimated to be raising about US$380m.
Accuracy Rate:
Our overall accuracy rate is 72% for IPOs and 63.8% for Placements
(Performance measurement criteria is explained at the end of the note)
New IPO filings
Edvantage Group (Hong Kong, ~US$100m)
Koolearn (Hong Kong, re-filed)
Shangde Qizhi Education Group (Hong Kong, re-filed)
Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
In this version of the GER weekly research wrap, we dig into the debt tender for Softbank Group (9984 JP) and assess the merger between TPG Telecom Ltd (TPM AU) and VHA. On the IPO front, we initiate on CStone Pharma (CSTONE HK) while we update on Ebang (EBANG HK) . Finally, we dig into the beat at Facebook Inc A (FB US) and assess whether there are further legs for the investment case. We also provide a list of upcoming catalysts for upcoming event-driven ideas.
More details can be found below.
Best of luck for the new week – Rickin, Venkat and Arun
We look at the main topics of interest that came out of the results so far and what this means for the oil and gas sector. The areas in focus were the strong cash flow generation and capex plans, reserve replacement, new LNG projects, IMO impact for the refining sector and digitalisation. The upstream areas that got the most focus were the US onshore (specifically the Permian), US Gulf of Mexico, Guyana, Brazil and Venezuela. This follows on from our note 2019 Energy Market Themes & Stocks with Exposure: Focus on Oil, Refining, LNG, M&A & Renewables.
Campbell Gunn tackled Toppan, whose market capitalisation has grown by only 2% per annum or just ¥34b since December 2013. From the recent peak in June 2017, Toppan shares have underperformed the market by 27% and, for the last year, have been at their most extreme value relative to TOPIX over the previous thirty years.
Toppan’s investment portfolio (341 companies with an aggregate market value as of the last quarter of ¥498bn) has grown at a 39.1% compound annual growth rate (CAGR) over the last five years, outperforming Toppan’s core operations (6.4% CAGR) and the overall stock market (7.5% CAGR). The economic reality for Toppan is that the company’s investment business has far surpassed the core business in terms of ‘margins’ and contribution to Net Assets.
The company has become more (relatively speaking) proactive in managing equity risk, and recently sold 10.5m shares in Recruit Holdings (6098 JP)(its largest investment holding) for approximately ¥31.5b, reducing Toppan’s holding in Japan’s leading listing employment services business from 6.57% to 6.05%. With this sale, Toppan’s liquid assets will now exceed US$3b or 58% of the current market capitalisation.
Toppan’s business and investment portfolio should be radically pruned or eliminated. Such a transformation probably requires a change of management, the presence of an activist investor, or both. The latter is the more likely outcome.
HHIC mainly comprises its own shipbuilding/marine plant business (75% of GAV) and 80.54% in Samho Heavy stake (15% of GAV), both unlisted. Samho Heavy owns a 42.40% stake in Hyundai Mipo Dockyard (010620 KS). HHIC announced it will split-off (no new shares issues) with the surviving company an intermediate holdco (same ticker, 009540) and new opco (unlisted) holding Samho Heavy and the in-house shipbuilding/marine plant business.
Next, DSME undertakes its own rights offer (39.9% of DSME’s shares), via a third party allocation to intermediate Holdco with a target value of ₩1.5tn, in an all cash deal. The intermediate holdco will ultimately hold a 68.3% stake in DSME. DSME will remain a listed company therefore no tender offer to the remaining shareholders is expected, according to Sanghyun Park. Details are not finalised and further information is expected on the 8 March.
Netmarble Games (251270 KS)officially announced it is interested in buying Nexon/NXC Corp. At this point, it appears that a higher probability scenario is for Tencent Holdings (700 HK) to form a consortium with either Netmarble Games or Kakao Corp (035720 KS) in bidding for Nexon/NXC Corp. Douglas’ justification for this are:
To avoid the cultural backlash from Korean gamers.
Tencent is a minority investor of both Netmarble Games and Kakao. Tencent’s 17.7% stake in Netmarble Games is worth ₩1.6tn. Tencent’s 6.7% stake in Kakao which is worth ₩0.6tn.
Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon.
Relationship problems started in 2013 when Itochu Corp (8001 JP) was pushed out of the leadership spot in Descente without any warning or even any face-saving honorary role for its outgoing leader. This was hostile and the frictions were laid bare for anyone who cared to see them. They got worse when Itochu bought shares last summer without telling Descente. They got even worse when Descente signed a deal which would effectively end in a merger with Wacoal without telling Itochu. So it should have been less of a surprise than it appeared when Itochu announced this past Thursday it would launch a Partial Tender Offer for 9.56% of the shares outstanding of Descente.
Itochu’s Partial Tender is interesting, and there is a trade here if enough people are sceptical of Descente’s ability to play hardball. It is, however, not particularly cheap, and the shares were below ¥2,000/share last Wednesday for a reason.
Because Itochu is putting itself in a place to not be able to win (i.e. not control the board post-tender, also knowing that Descente could dilute them at will), this is an invitation by Itochu to minority shareholders to make their opinions known, for the media and commentators to do so too, and for someone else to come in over the top.
Travis Lundy thinks this goes to close to ¥2800 – and did close at ¥2,771 on Friday – because of expectations that Descente will find a white knight to pay more or that the family could launch an MBO. Anybody who wants Descente doesn’t want it for its Japan business. So paying a higher price than someone who wants to expand aggressively in China to allow entrenched management to not expand aggressively in China requires deeper pockets or a lot more patience.
Healthscope has announced it has entered into an Implementation Deed with Brookfield, under which Brookfield seeks to acquire 100% of Healthscope by way of a scheme at A$2.50/share, and a simultaneous Off-market takeover Offer at $2.40/share, both inclusive of an interim dividend of $.035/share. The considerations under these proposals compare to the earlier indicative considerations of $2.585/share and $2.455/share respectively under the unsolicited conditional proposals announced back in November.
HSO also announced that the BGH-led consortium, which holds a ~20% stake, said it could improve the terms of its previous offer of $2.36/share, provided it was given access to Healthscope’s data room.
The 3.3% and 2.2% step down in Consideration under the Scheme and Off-market Offer compared to the earlier proposals underscores the uneasy backdrop to this Offer on account of various operational issues faced by Healthscope. It also underlines the fact that even provided due diligence, there can be no guarantee the BGH-led consortium will bump its initial bid.
Shares are trading at a punchy $2.45/share, facing either the Scheme proposal or the possibility the BGH ups its offer, with or without due diligence. This is a mid-single-digits annualized return which assumes that either BGH will up, or will take the Scheme rather than see whether the Off-Market Takeover gets done. This is okay, but not great. I’d look to enter closer to the Off-market consideration level.
On 26 October Hitachi Ltd (6501 JP)and Faurecia (EO FP)announced that Faurecia would take over Hitachi car audio and infotainment equipment subsidiary in Clarion a tender offer to be launched 3+ months hence. Clarion has now announced a forecast revision for the fiscal year to 31 March 2019 which involves a shortfall in revenue of 9.1%, a 16.7% drop in forecast Operating Profit, and a drop in Net Profit from ¥1.7bn to a loss of ¥500mn (a ¥2.2bn swing); fortunately Faurecia also announced it will go through with the deal with no changes (other than to extend the Tender Offer to 21 business days).
This deal is quite straightforward. The deal is on schedule and coming through as planned.
Travis expects this deal will end up with Faurecia owning over 90% and there will be a Demand For Shares as allowed to Special Controlling Shareholders (under Article 179, Paragraph 1 of the Companies Act) allowing them to force out minorities, potentially by the 3rd week of March 2019.
At the current close of ¥2,496, it is offering <2% annualized return for slightly more than one-month of cash usage, and negligible risk this deal doesn’t go through. Tight, but to be expected.
Thirty minutes after Eclipx guided down its FY19 NPATA figure, Mcmillan Shakespeare (MMS AU)announced that the first court meeting to be held on the 1st February – which would consider the Scheme documents that are sent to ECX shareholders – will be rescheduled. No new date was announced.
Taken purely on the guidance downgrade and the MAC’s described in the SIA, on balance, this deal still looks good to go. I don’t see a MAC being triggered here.
But this new development could/should also be viewed in conjunction with the large step down in NPATA guidance for FY18 (announced on the 6 August 2018, and resulted in the large decline as seen in the chart below), where FY18 NPATA was guidance was reduced to A$77-$80mn (13-17% growth ) versus prior guidance of 27-30% growth. Perhaps MMS want ECX to come out and say their forecast for annual NPATA is down 10%.
Still, at a 15% gross spread to terms and trading ~5% above its undisturbed price, prior to Sg Fleet (SGF AU)‘s August proposal – while ECX’s peer group is down 17% on average since SGF’s tilt – the negative news surrounding the NPATA guidance and the MACs appears fully priced in.
The deal is done. Shareholders approved the deal. Given where book value and market prices were on the day before the revised plan was announced on 7 December, Travis expects a spirited appraisal rights process.
For those who are now looking at this as an arb situation, the return is quite decent if you buy on the bid and can get multiples of leverage and keep them after the shares have been delisted, while waiting for payment. If you can get multiples of leverage only while the shares are listed, it is still pretty OK. If you are an arb with no leverage, this is still OK for a Japanese deal.
SCSK announced a Tender Offer to buy out minorities in Veriserve, in which it holds 55.59% of voting rights. The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price. The price does not seem egregiously unfair, but for investors who own it who think it has another double in it this year they might get upset. And the lack of good process here deserves attention.
The lack of imagining a competing bid is not good governance. The lack of looking for one is not either. The lack of true fairness opinion is also not good governance.
Still, it is at a 14+year high. It is a small cap. Not that many people will care. It is not cheap on a PER basis and not really inexpensive on an EV/EBITDA basis.
There IS a chance, theoretically, that this does not go through. SCSK doesn’t have a super-majority, and if it does not get 11.1% of the shares outstanding, it will not be able to automatically squeeze out minorities. But Travis does not think it will be particularly difficult to get there.
Sumitomo Corp (8053 JP) consolidated subsidiary SCSK Corp (9719 JP) announced a Tender Offer to buy out minorities in JIEC at ¥2,750/share, in which it has 69.52% of voting rights. This deal is a worthwhile example of some of the weaknesses in the execution of the current Corporate Governance Code and the “fairness” of M&A in Japan.
The lack of a competing bid and true fairness opinion are not good governance. The fact that the bid is 1.4% above the bottom of the Target’s own Advisor’s fair value DCF valuation range while the top of the range is 61.3% higher is disappointing.
But what are you gonna do? SCSK has a super-majority. The stock is super-duper illiquid. The Offer is a 31% premium to the highest price ever paid for the stock. There is no minimum to the tender so it will be “successful” if no one tenders.
So you suck it up and buy and tender, or tender what you own. And then you write a public comment to the METI Fair M&A process.
Mastercard Inc Class A (MA US) has made a £233mn Offer (£0.33/share) to take over cross-border payments firm Earthport, trumpingVisa Inc Class A Shares (V US)‘s offer late December by 10%. The Offer is conditional on 75% of EPO’s shareholders accepting with 13.08% of shares outstanding in the bag. EPO’s shares increased to £0.282 following Visa’s offer, but currently trade at £0.37.50, ~14% above the latest offer, suggesting a higher bid is likely, or at least expected.
For EPO shareholders, who watched their shares erase 70% of their value over the last 2 years and trade around £0.05 earlier this month, this is a fantastic result. Mastercard’s bid also comes at a 65% premium to the placement at £0.20/share on 4 October 2017.
A (significantly) higher offer price is plausible. EPO can be seen as a disruptor to these card giants. Instantaneous bank-to-bank transfers and the increase in mobile payments are a threat to their traditional business models as they eliminate payment cards from the transaction loop. Both Visa and Mastercard have deep pockets and EPO would help both Visa and Mastercard expand their product offering.
There is no clear or discernible pricing methodology to exact where a bidding war will send the share price. But it could get (unsurprisingly) crazier from here. I think a £0.40/share offer is not unreasonable or out of the question, and is a level where shares often found support for a year and half back in 2014 and 2015.
CMA CGM SA (144898Z FP)has published its prospectus for what is evidently a heavily orchestrated Public Tender Offer for CEVA. Ceva’s Board has concluded that offer is fair & reasonable but does not recommend shareholders tender. CMA CGM added that “the recommendation to shareholders from the CEVA board not to tender shares in exchange for cash is done in perfect agreement with CMA CGM“.
CMA CGM currently holds 50.6% of CEVA, via a 33% direct stake with the remainder in derivatives. After a 10-trading day cooling off period, the offer will be open for acceptances between February 12 to March 12, unless extended. It is the intention of CMA CGM to maintain CEVA’s listing.
For the month of January, seventeen new deals were discussed on Smartkarma with an overall deal size of US$91bn. This number does not include rumours on Nexon Gt Co Ltd (041140 KS) and Capitaland Ltd (CAPL SP)‘s acquisition of Ascendas-Singbridge. The average transaction premium was 43%, or 26% if ignoring Earthport plc (EPO LN)‘s offer. This insight provides a summary of ongoing M&A situations and a recap of news associated with each event situation in January.
HOC initially targeted an IPO in 2018 with an expected market cap and an enterprise value of ~₩8tn and ₩10tn respectively, as discussed by Sanghyun in an earlier insight (Hyundai Oilbank IPO Update: Timeline & Valuation). The IPO was postponed after the regulator picked over the balance sheet; and probably just as well, as falling refining margins resulted in HOC’s operating profit declining 42% to ₩661bn last year. The sale to Aramco is expected to push the IPO back to later this year.
Prior to Aramco’s involvement, HHI was (and effectively is) a weakish stub with the 31% stake in HHIC accounting for just 32%/26% of NAV/GAV; the unlisted operations and the future earnings of those investments were more critical to understanding HHI’s valuation. This investment by Aramco quantifies the valuation for the majority (~95%) of HHI’s unlisted investments, reinforcing the already somewhat prevalent view that HHI’s discount to NAV was excessively wide.
But HHI/HHIC weren’t done yet. Just when the NAV was expected to narrow further – especially as additional newsflow filters in on the outcome of the board meetings, the expected timeline to completion, and the possibility of HOC’s IPO later this year – HHIC announced a split-off, a PIK and rights issue. Please refer to this development in the “Events” section above.
The U.S. Treasury (OFAC) has lifted sanctions imposed on En+ Group plc, UC Rusal plc, and JSC EuroSibEnergo. The key to lifting these sanctions was Oleg Deripaska reducing his direct and indirect shareholding stake in these companies and severing his control. All sanctions on Deripaska continue in force.
Rusal announced that En+ had entered into a securities exchange agreement with Glencore, pursuant to which Glencore shall transfer 8.75% of Rusal’s shares to En+ in consideration for En+ issuing new GDRs to Glencore representing approximately 10.55% of the enlarged share capital of En+.
The transfer will be done in two stages: 2% to be transferred following the removal of Rusal and EN+ from the SDN list; and 6.75% 12 months later. This two-stage process appears geared to circumvent a mandatory takeover by En+. Hong Kong employs a “creeper” speed limit, where shareholders (holding between 30-50%) can creep their shareholding upwards by 2% in a 12-month period (Rule 26.1 (c)).
As an aside, after sanctions were lifted, En+ announced seven new directors, including Christopher Bancroft Burnham, who served as Under Secretary-General for Management of the United Nations (alongside John Bolton, Trump’s current national security adviser). Burnham was also on Trump’s Presidential Transition Team
Rusal’s NAV discount has narrowed to 68.5% from 71% the previous Friday. This compares to the 45-50% discount range prior to the sanctions being imposed. This should narrow further.
I issued a month-end share class summary, a companion insight to Travis’ H/A Spread & Southbound Monitors and Ke Yan‘s HK Connect Discovery Weeklies. This share class monitor provides a snapshot of the premium/discounts for 215 share classifications (ADRs, Koran prefs, Dual-class, Thai foreign/local Thai) around the region.
The average premium/discount for each set over a one-year period is graphed below.
By Travis’ calcs, there was something on the order of ¥630-650bn of shares of several names to buy on the close this past Wednesday. There was also, therefore, something like ¥630-650bn of TOPIX and JPX Nikkei 400 (almost all TOPIX) to sell on the close of Wednesday.
Softbank Corp (9434 JP) was expected to see total buying of ¥340bn or so; and Takeda Pharmaceutical (4502 JP)buying of ¥260-280bn at the close. (Both names did trade a very large amount off-market.) A number of other names see TOPIX inclusions because of them listing on TSE1 in December or because of share count increasing because of merger (like LIFULL (2120 JP)) or because of offerings.
A VERY significant amount of both names were purchased in “guaranteed close” trades where indexers actually paid close-plus pricing until the very end of the day because of fears that the actual market might not close. This meant that on-market volume for Takeda and Softbank was a fraction of what might be expected. The risk was transferred but to get in the flow you had to trade off-market.
The Centuria Capital (CNI AU) resolution has passed. This resolution was not a vote to decide on tendering the shares held by CNI in Propertylink Group (PLG AU) into ESR’s offer; but to give CNI’s board the authorisation to tender (or not to tender) those PLG shares.
Minebea Co Ltd (6479 JP)announced that it had received all relevant anti-trust approvals but would not start the Tender Offer for U Shin Ltd (6985 JP) until the start of February (the original announcement had said the Tender would commence at the end of January).
The interesting path of the Mobius strip of connections that is the HCN continues: China Goldjoy (1282 HK)‘s chairman Yao Jianhui (& others) have pledged 12.14% of China Goldjoy to Huarong Investments (2277HK). Goldjoy is the Offeror for New Sports Group (299 HK).
CCASS
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
Keyence reported higher sales and profits but lower rates of growth in the three month to December. Consolidated sales were up 11.8% year-on-year compared with 15.2% growth in 2Q and 19.7% growth in 1Q. Operating profit was up 9.1% compared with 12.7% growth in 2Q and 21.2% growth in 1Q. The operating margin declined to 53.8% compared with 55.2% in 2Q, 54.6% in 1Q and 56.6% in 4Q of FY Mar-18.
Once again, the results at Keyence were much better than those at other factory automation related companies – notably Fanuc (6954 JP) and Omron (6645 JP), where operating profits dropped at double-digit rates. But Keyence is geared to incremental improvements rather than large capital outlays, and to customers’ R&D spending, and it has a diversified base of user industries. On the other hand, it is not immune to weakening demand in China, Europe and elsewhere.
Since hitting a 52-week low of ¥50, 780 on October 26, Keyence has rebounded by 13%. At ¥57,270, the shares are now selling at 30x our EPS estimate for this fiscal year and 27x our estimate for FY Mar-20. Their 5-year historical P/E range is 18x – 42x. Other valuations are also well up in their historical ranges.
The sales and profit data suggest difficult year-on-year comparisons for the next few quarters.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.
Happy Lunar New Year to everyone from Aequitas Research!
It has been a fairly quiet week leading up to Chinese New Year but it is not stopping Maoyan Entertainment (1896 HK) from listing on Monday. The IPO was priced at the bottom end of its offering range. The last we checked, it traded up 3% in the grey market on Friday. Ke Yan, CFA, FRM will follow up with a short note of his thoughts on post-IPO trading dynamics and bookbuild subscription levels.
Other updates on IPO in Hong Kong include Sinochem Energy allowing its IPO application to lapse while Koolearn (1373356D HK) and Shangde Qizhi Education re-filed for IPO. Edvantage, another new education IPO (and likely to be borderline US$100m deal size) filed for Hong Kong listing this week as well.
China Tower (788 HK)‘s lock-up will be expiring on the 8th of February and Ke Yan, CFA, FRM mentioned in his insight that any potential placement will be a good opportunity to accumulate the stock. Placements from cornerstone investors will likely be a liquidity event.
In India, Chalet Hotels Limited (CHALET IN) closed its bookbuild with a tepid overall demand of 1.57x. The silver lining for the IPO is that the institutional tranche saw a healthy 4.6x demand, similar to that of Lemon Tree Hotels (LEMONTRE IN) in terms of weak overall but strong institutional demand, which ended up performing well in its IPO.
Other upcoming India IPOs include Mazagon Dock Shipbuilders Ltd (9155507Z IN) and Embassy REIT which were said to be seeking listing towards the end of February. Sterling and Wilson is also looking to file its INR50bn IPO with the Sebi soon.
In Japan, Wingarc1st announced its IPO bookbuild to start on the 25th of February and will be listing in March. It is estimated to be raising about US$380m.
Accuracy Rate:
Our overall accuracy rate is 72% for IPOs and 63.8% for Placements
(Performance measurement criteria is explained at the end of the note)
New IPO filings
Edvantage Group (Hong Kong, ~US$100m)
Koolearn (Hong Kong, re-filed)
Shangde Qizhi Education Group (Hong Kong, re-filed)
Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Campbell Gunn tackled Toppan, whose market capitalisation has grown by only 2% per annum or just ¥34b since December 2013. From the recent peak in June 2017, Toppan shares have underperformed the market by 27% and, for the last year, have been at their most extreme value relative to TOPIX over the previous thirty years.
Toppan’s investment portfolio (341 companies with an aggregate market value as of the last quarter of ¥498bn) has grown at a 39.1% compound annual growth rate (CAGR) over the last five years, outperforming Toppan’s core operations (6.4% CAGR) and the overall stock market (7.5% CAGR). The economic reality for Toppan is that the company’s investment business has far surpassed the core business in terms of ‘margins’ and contribution to Net Assets.
The company has become more (relatively speaking) proactive in managing equity risk, and recently sold 10.5m shares in Recruit Holdings (6098 JP)(its largest investment holding) for approximately ¥31.5b, reducing Toppan’s holding in Japan’s leading listing employment services business from 6.57% to 6.05%. With this sale, Toppan’s liquid assets will now exceed US$3b or 58% of the current market capitalisation.
Toppan’s business and investment portfolio should be radically pruned or eliminated. Such a transformation probably requires a change of management, the presence of an activist investor, or both. The latter is the more likely outcome.
HHIC mainly comprises its own shipbuilding/marine plant business (75% of GAV) and 80.54% in Samho Heavy stake (15% of GAV), both unlisted. Samho Heavy owns a 42.40% stake in Hyundai Mipo Dockyard (010620 KS). HHIC announced it will split-off (no new shares issues) with the surviving company an intermediate holdco (same ticker, 009540) and new opco (unlisted) holding Samho Heavy and the in-house shipbuilding/marine plant business.
Next, DSME undertakes its own rights offer (39.9% of DSME’s shares), via a third party allocation to intermediate Holdco with a target value of ₩1.5tn, in an all cash deal. The intermediate holdco will ultimately hold a 68.3% stake in DSME. DSME will remain a listed company therefore no tender offer to the remaining shareholders is expected, according to Sanghyun Park. Details are not finalised and further information is expected on the 8 March.
Netmarble Games (251270 KS)officially announced it is interested in buying Nexon/NXC Corp. At this point, it appears that a higher probability scenario is for Tencent Holdings (700 HK) to form a consortium with either Netmarble Games or Kakao Corp (035720 KS) in bidding for Nexon/NXC Corp. Douglas’ justification for this are:
To avoid the cultural backlash from Korean gamers.
Tencent is a minority investor of both Netmarble Games and Kakao. Tencent’s 17.7% stake in Netmarble Games is worth ₩1.6tn. Tencent’s 6.7% stake in Kakao which is worth ₩0.6tn.
Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon.
Relationship problems started in 2013 when Itochu Corp (8001 JP) was pushed out of the leadership spot in Descente without any warning or even any face-saving honorary role for its outgoing leader. This was hostile and the frictions were laid bare for anyone who cared to see them. They got worse when Itochu bought shares last summer without telling Descente. They got even worse when Descente signed a deal which would effectively end in a merger with Wacoal without telling Itochu. So it should have been less of a surprise than it appeared when Itochu announced this past Thursday it would launch a Partial Tender Offer for 9.56% of the shares outstanding of Descente.
Itochu’s Partial Tender is interesting, and there is a trade here if enough people are sceptical of Descente’s ability to play hardball. It is, however, not particularly cheap, and the shares were below ¥2,000/share last Wednesday for a reason.
Because Itochu is putting itself in a place to not be able to win (i.e. not control the board post-tender, also knowing that Descente could dilute them at will), this is an invitation by Itochu to minority shareholders to make their opinions known, for the media and commentators to do so too, and for someone else to come in over the top.
Travis Lundy thinks this goes to close to ¥2800 – and did close at ¥2,771 on Friday – because of expectations that Descente will find a white knight to pay more or that the family could launch an MBO. Anybody who wants Descente doesn’t want it for its Japan business. So paying a higher price than someone who wants to expand aggressively in China to allow entrenched management to not expand aggressively in China requires deeper pockets or a lot more patience.
Healthscope has announced it has entered into an Implementation Deed with Brookfield, under which Brookfield seeks to acquire 100% of Healthscope by way of a scheme at A$2.50/share, and a simultaneous Off-market takeover Offer at $2.40/share, both inclusive of an interim dividend of $.035/share. The considerations under these proposals compare to the earlier indicative considerations of $2.585/share and $2.455/share respectively under the unsolicited conditional proposals announced back in November.
HSO also announced that the BGH-led consortium, which holds a ~20% stake, said it could improve the terms of its previous offer of $2.36/share, provided it was given access to Healthscope’s data room.
The 3.3% and 2.2% step down in Consideration under the Scheme and Off-market Offer compared to the earlier proposals underscores the uneasy backdrop to this Offer on account of various operational issues faced by Healthscope. It also underlines the fact that even provided due diligence, there can be no guarantee the BGH-led consortium will bump its initial bid.
Shares are trading at a punchy $2.45/share, facing either the Scheme proposal or the possibility the BGH ups its offer, with or without due diligence. This is a mid-single-digits annualized return which assumes that either BGH will up, or will take the Scheme rather than see whether the Off-Market Takeover gets done. This is okay, but not great. I’d look to enter closer to the Off-market consideration level.
On 26 October Hitachi Ltd (6501 JP)and Faurecia (EO FP)announced that Faurecia would take over Hitachi car audio and infotainment equipment subsidiary in Clarion a tender offer to be launched 3+ months hence. Clarion has now announced a forecast revision for the fiscal year to 31 March 2019 which involves a shortfall in revenue of 9.1%, a 16.7% drop in forecast Operating Profit, and a drop in Net Profit from ¥1.7bn to a loss of ¥500mn (a ¥2.2bn swing); fortunately Faurecia also announced it will go through with the deal with no changes (other than to extend the Tender Offer to 21 business days).
This deal is quite straightforward. The deal is on schedule and coming through as planned.
Travis expects this deal will end up with Faurecia owning over 90% and there will be a Demand For Shares as allowed to Special Controlling Shareholders (under Article 179, Paragraph 1 of the Companies Act) allowing them to force out minorities, potentially by the 3rd week of March 2019.
At the current close of ¥2,496, it is offering <2% annualized return for slightly more than one-month of cash usage, and negligible risk this deal doesn’t go through. Tight, but to be expected.
Thirty minutes after Eclipx guided down its FY19 NPATA figure, Mcmillan Shakespeare (MMS AU)announced that the first court meeting to be held on the 1st February – which would consider the Scheme documents that are sent to ECX shareholders – will be rescheduled. No new date was announced.
Taken purely on the guidance downgrade and the MAC’s described in the SIA, on balance, this deal still looks good to go. I don’t see a MAC being triggered here.
But this new development could/should also be viewed in conjunction with the large step down in NPATA guidance for FY18 (announced on the 6 August 2018, and resulted in the large decline as seen in the chart below), where FY18 NPATA was guidance was reduced to A$77-$80mn (13-17% growth ) versus prior guidance of 27-30% growth. Perhaps MMS want ECX to come out and say their forecast for annual NPATA is down 10%.
Still, at a 15% gross spread to terms and trading ~5% above its undisturbed price, prior to Sg Fleet (SGF AU)‘s August proposal – while ECX’s peer group is down 17% on average since SGF’s tilt – the negative news surrounding the NPATA guidance and the MACs appears fully priced in.
The deal is done. Shareholders approved the deal. Given where book value and market prices were on the day before the revised plan was announced on 7 December, Travis expects a spirited appraisal rights process.
For those who are now looking at this as an arb situation, the return is quite decent if you buy on the bid and can get multiples of leverage and keep them after the shares have been delisted, while waiting for payment. If you can get multiples of leverage only while the shares are listed, it is still pretty OK. If you are an arb with no leverage, this is still OK for a Japanese deal.
SCSK announced a Tender Offer to buy out minorities in Veriserve, in which it holds 55.59% of voting rights. The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price. The price does not seem egregiously unfair, but for investors who own it who think it has another double in it this year they might get upset. And the lack of good process here deserves attention.
The lack of imagining a competing bid is not good governance. The lack of looking for one is not either. The lack of true fairness opinion is also not good governance.
Still, it is at a 14+year high. It is a small cap. Not that many people will care. It is not cheap on a PER basis and not really inexpensive on an EV/EBITDA basis.
There IS a chance, theoretically, that this does not go through. SCSK doesn’t have a super-majority, and if it does not get 11.1% of the shares outstanding, it will not be able to automatically squeeze out minorities. But Travis does not think it will be particularly difficult to get there.
Sumitomo Corp (8053 JP) consolidated subsidiary SCSK Corp (9719 JP) announced a Tender Offer to buy out minorities in JIEC at ¥2,750/share, in which it has 69.52% of voting rights. This deal is a worthwhile example of some of the weaknesses in the execution of the current Corporate Governance Code and the “fairness” of M&A in Japan.
The lack of a competing bid and true fairness opinion are not good governance. The fact that the bid is 1.4% above the bottom of the Target’s own Advisor’s fair value DCF valuation range while the top of the range is 61.3% higher is disappointing.
But what are you gonna do? SCSK has a super-majority. The stock is super-duper illiquid. The Offer is a 31% premium to the highest price ever paid for the stock. There is no minimum to the tender so it will be “successful” if no one tenders.
So you suck it up and buy and tender, or tender what you own. And then you write a public comment to the METI Fair M&A process.
Mastercard Inc Class A (MA US) has made a £233mn Offer (£0.33/share) to take over cross-border payments firm Earthport, trumpingVisa Inc Class A Shares (V US)‘s offer late December by 10%. The Offer is conditional on 75% of EPO’s shareholders accepting with 13.08% of shares outstanding in the bag. EPO’s shares increased to £0.282 following Visa’s offer, but currently trade at £0.37.50, ~14% above the latest offer, suggesting a higher bid is likely, or at least expected.
For EPO shareholders, who watched their shares erase 70% of their value over the last 2 years and trade around £0.05 earlier this month, this is a fantastic result. Mastercard’s bid also comes at a 65% premium to the placement at £0.20/share on 4 October 2017.
A (significantly) higher offer price is plausible. EPO can be seen as a disruptor to these card giants. Instantaneous bank-to-bank transfers and the increase in mobile payments are a threat to their traditional business models as they eliminate payment cards from the transaction loop. Both Visa and Mastercard have deep pockets and EPO would help both Visa and Mastercard expand their product offering.
There is no clear or discernible pricing methodology to exact where a bidding war will send the share price. But it could get (unsurprisingly) crazier from here. I think a £0.40/share offer is not unreasonable or out of the question, and is a level where shares often found support for a year and half back in 2014 and 2015.
CMA CGM SA (144898Z FP)has published its prospectus for what is evidently a heavily orchestrated Public Tender Offer for CEVA. Ceva’s Board has concluded that offer is fair & reasonable but does not recommend shareholders tender. CMA CGM added that “the recommendation to shareholders from the CEVA board not to tender shares in exchange for cash is done in perfect agreement with CMA CGM“.
CMA CGM currently holds 50.6% of CEVA, via a 33% direct stake with the remainder in derivatives. After a 10-trading day cooling off period, the offer will be open for acceptances between February 12 to March 12, unless extended. It is the intention of CMA CGM to maintain CEVA’s listing.
For the month of January, seventeen new deals were discussed on Smartkarma with an overall deal size of US$91bn. This number does not include rumours on Nexon Gt Co Ltd (041140 KS) and Capitaland Ltd (CAPL SP)‘s acquisition of Ascendas-Singbridge. The average transaction premium was 43%, or 26% if ignoring Earthport plc (EPO LN)‘s offer. This insight provides a summary of ongoing M&A situations and a recap of news associated with each event situation in January.
HOC initially targeted an IPO in 2018 with an expected market cap and an enterprise value of ~₩8tn and ₩10tn respectively, as discussed by Sanghyun in an earlier insight (Hyundai Oilbank IPO Update: Timeline & Valuation). The IPO was postponed after the regulator picked over the balance sheet; and probably just as well, as falling refining margins resulted in HOC’s operating profit declining 42% to ₩661bn last year. The sale to Aramco is expected to push the IPO back to later this year.
Prior to Aramco’s involvement, HHI was (and effectively is) a weakish stub with the 31% stake in HHIC accounting for just 32%/26% of NAV/GAV; the unlisted operations and the future earnings of those investments were more critical to understanding HHI’s valuation. This investment by Aramco quantifies the valuation for the majority (~95%) of HHI’s unlisted investments, reinforcing the already somewhat prevalent view that HHI’s discount to NAV was excessively wide.
But HHI/HHIC weren’t done yet. Just when the NAV was expected to narrow further – especially as additional newsflow filters in on the outcome of the board meetings, the expected timeline to completion, and the possibility of HOC’s IPO later this year – HHIC announced a split-off, a PIK and rights issue. Please refer to this development in the “Events” section above.
The U.S. Treasury (OFAC) has lifted sanctions imposed on En+ Group plc, UC Rusal plc, and JSC EuroSibEnergo. The key to lifting these sanctions was Oleg Deripaska reducing his direct and indirect shareholding stake in these companies and severing his control. All sanctions on Deripaska continue in force.
Rusal announced that En+ had entered into a securities exchange agreement with Glencore, pursuant to which Glencore shall transfer 8.75% of Rusal’s shares to En+ in consideration for En+ issuing new GDRs to Glencore representing approximately 10.55% of the enlarged share capital of En+.
The transfer will be done in two stages: 2% to be transferred following the removal of Rusal and EN+ from the SDN list; and 6.75% 12 months later. This two-stage process appears geared to circumvent a mandatory takeover by En+. Hong Kong employs a “creeper” speed limit, where shareholders (holding between 30-50%) can creep their shareholding upwards by 2% in a 12-month period (Rule 26.1 (c)).
As an aside, after sanctions were lifted, En+ announced seven new directors, including Christopher Bancroft Burnham, who served as Under Secretary-General for Management of the United Nations (alongside John Bolton, Trump’s current national security adviser). Burnham was also on Trump’s Presidential Transition Team
Rusal’s NAV discount has narrowed to 68.5% from 71% the previous Friday. This compares to the 45-50% discount range prior to the sanctions being imposed. This should narrow further.
I issued a month-end share class summary, a companion insight to Travis’ H/A Spread & Southbound Monitors and Ke Yan‘s HK Connect Discovery Weeklies. This share class monitor provides a snapshot of the premium/discounts for 215 share classifications (ADRs, Koran prefs, Dual-class, Thai foreign/local Thai) around the region.
The average premium/discount for each set over a one-year period is graphed below.
By Travis’ calcs, there was something on the order of ¥630-650bn of shares of several names to buy on the close this past Wednesday. There was also, therefore, something like ¥630-650bn of TOPIX and JPX Nikkei 400 (almost all TOPIX) to sell on the close of Wednesday.
Softbank Corp (9434 JP) was expected to see total buying of ¥340bn or so; and Takeda Pharmaceutical (4502 JP)buying of ¥260-280bn at the close. (Both names did trade a very large amount off-market.) A number of other names see TOPIX inclusions because of them listing on TSE1 in December or because of share count increasing because of merger (like LIFULL (2120 JP)) or because of offerings.
A VERY significant amount of both names were purchased in “guaranteed close” trades where indexers actually paid close-plus pricing until the very end of the day because of fears that the actual market might not close. This meant that on-market volume for Takeda and Softbank was a fraction of what might be expected. The risk was transferred but to get in the flow you had to trade off-market.
The Centuria Capital (CNI AU) resolution has passed. This resolution was not a vote to decide on tendering the shares held by CNI in Propertylink Group (PLG AU) into ESR’s offer; but to give CNI’s board the authorisation to tender (or not to tender) those PLG shares.
Minebea Co Ltd (6479 JP)announced that it had received all relevant anti-trust approvals but would not start the Tender Offer for U Shin Ltd (6985 JP) until the start of February (the original announcement had said the Tender would commence at the end of January).
The interesting path of the Mobius strip of connections that is the HCN continues: China Goldjoy (1282 HK)‘s chairman Yao Jianhui (& others) have pledged 12.14% of China Goldjoy to Huarong Investments (2277HK). Goldjoy is the Offeror for New Sports Group (299 HK).
CCASS
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
Keyence reported higher sales and profits but lower rates of growth in the three month to December. Consolidated sales were up 11.8% year-on-year compared with 15.2% growth in 2Q and 19.7% growth in 1Q. Operating profit was up 9.1% compared with 12.7% growth in 2Q and 21.2% growth in 1Q. The operating margin declined to 53.8% compared with 55.2% in 2Q, 54.6% in 1Q and 56.6% in 4Q of FY Mar-18.
Once again, the results at Keyence were much better than those at other factory automation related companies – notably Fanuc (6954 JP) and Omron (6645 JP), where operating profits dropped at double-digit rates. But Keyence is geared to incremental improvements rather than large capital outlays, and to customers’ R&D spending, and it has a diversified base of user industries. On the other hand, it is not immune to weakening demand in China, Europe and elsewhere.
Since hitting a 52-week low of ¥50, 780 on October 26, Keyence has rebounded by 13%. At ¥57,270, the shares are now selling at 30x our EPS estimate for this fiscal year and 27x our estimate for FY Mar-20. Their 5-year historical P/E range is 18x – 42x. Other valuations are also well up in their historical ranges.
The sales and profit data suggest difficult year-on-year comparisons for the next few quarters.
Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.
Happy Lunar New Year to everyone from Aequitas Research!
It has been a fairly quiet week leading up to Chinese New Year but it is not stopping Maoyan Entertainment (1896 HK) from listing on Monday. The IPO was priced at the bottom end of its offering range. The last we checked, it traded up 3% in the grey market on Friday. Ke Yan, CFA, FRM will follow up with a short note of his thoughts on post-IPO trading dynamics and bookbuild subscription levels.
Other updates on IPO in Hong Kong include Sinochem Energy allowing its IPO application to lapse while Koolearn (1373356D HK) and Shangde Qizhi Education re-filed for IPO. Edvantage, another new education IPO (and likely to be borderline US$100m deal size) filed for Hong Kong listing this week as well.
China Tower (788 HK)‘s lock-up will be expiring on the 8th of February and Ke Yan, CFA, FRM mentioned in his insight that any potential placement will be a good opportunity to accumulate the stock. Placements from cornerstone investors will likely be a liquidity event.
In India, Chalet Hotels Limited (CHALET IN) closed its bookbuild with a tepid overall demand of 1.57x. The silver lining for the IPO is that the institutional tranche saw a healthy 4.6x demand, similar to that of Lemon Tree Hotels (LEMONTRE IN) in terms of weak overall but strong institutional demand, which ended up performing well in its IPO.
Other upcoming India IPOs include Mazagon Dock Shipbuilders Ltd (9155507Z IN) and Embassy REIT which were said to be seeking listing towards the end of February. Sterling and Wilson is also looking to file its INR50bn IPO with the Sebi soon.
In Japan, Wingarc1st announced its IPO bookbuild to start on the 25th of February and will be listing in March. It is estimated to be raising about US$380m.
Accuracy Rate:
Our overall accuracy rate is 72% for IPOs and 63.8% for Placements
(Performance measurement criteria is explained at the end of the note)
New IPO filings
Edvantage Group (Hong Kong, ~US$100m)
Koolearn (Hong Kong, re-filed)
Shangde Qizhi Education Group (Hong Kong, re-filed)
Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.
This is a monthly version of our HK Connect Weekly note, in which I highlight Hong Kong-listed companies leading the southbound flow weekly. Over the past month, we have seen the flow turning from outflow to inflow. Our previous insights published in Jan can be found in the links below. In this insight, we will focus on the month flow to get a bigger picture vs the weekly flow.
Our January Coverage of Hong Kong Connect southbound flow
We met with MacroAsia management in Manila to discuss their most recent 3Q18 results and outlook for the coming year. The key takeaways were that: growth from LTP would be underpinned by business from PAL Express’s new A321 Neo and turboprop fleet; the ground handling and catering businesses will see growth from mid-March as PAL contracts with Sky Kitchen and Sky Logistics are terminated and awarded to MacroAsia; and lastly, that margin pressure due to cost inflation in the catering business should normalize during the second half as agreements are renegotiated.
Our estimated FY18 NPAT of P948mn is broadly in-line with management guidance and implies a valuation of 23.5x trailing P/E. We still that despite the recent fall in share price, this valuation will come under pressure until the company can demonstrate a return to earnings growth after a challenging year.
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Below is a comprehensive summary of the Hyundai Heavy/DSME event that engulfed the Korean market yesterday. This is a multi step process. Details of most events will be determined after one month of holdback period.
I will provide a trade approach on each name in a follow-up post.
SCSK currently holds 2,900,000 shares or 55.59% of voting rights.
The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price of the day before the announcement (¥4,665), a 44.6% premium to the one-month average, a 28.3% premium to the 3-month average, and a 36.6% premium to the 6-month average.
The price does not seem egregiously unfair, but for investors who own it who think it has another double in it this year they might get upset.
This is one of those situations with which the currently underway METI M&A Fairness enquiry might have a problem.
And if you care about the fairness of the M&A bidding and response process, and ensuring that minority investors get their interests defended by process, have a look at the METI Fair M&A panel and its consultation paper and by all means offer your comments.
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SCSK currently holds 2,900,000 shares or 55.59% of voting rights.
The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price of the day before the announcement (¥4,665), a 44.6% premium to the one-month average, a 28.3% premium to the 3-month average, and a 36.6% premium to the 6-month average.
The price does not seem egregiously unfair, but for investors who own it who think it has another double in it this year they might get upset.
This is one of those situations with which the currently underway METI M&A Fairness enquiry might have a problem.
And if you care about the fairness of the M&A bidding and response process, and ensuring that minority investors get their interests defended by process, have a look at the METI Fair M&A panel and its consultation paper and by all means offer your comments.
Misumi Group sold off after announcing poor 3Q results and another downward revision to FY Mar-19 sales and profit guidance, but bounced right back to finish at ¥2,480 yesterday (January 31), which is 30x management’s new EPS estimate for this fiscal year. Price/book value (as of the end of December) is 3.6x. The indicated dividend was cut in line with guidance, maintaining management’s 25% payout ratio target but resulting in a dividend yield of 0.8%.
Operating and net profits are now expected to decline. Management is guiding for a 7.1% increase in sales in FY Mar-19 as a whole, but monthly data shows year-on-year growth dropping to 5.2% in November and 3.1% in December. Factory Automation sales were unchanged in November and down 1.3% in December,
In the three months to December, operating profit dropped 17.8% year-on-year on a 5.7% increase in sales, with Factory Automation profit down 16.9% and VONA profit down 35.4%. Inventory was up while receivables were down. Sales growth in China turned negative.
The company continues to invest in production capacity, logistics and IT, aiming to expand its Factory Automation and VONA e-commerce businesses in Japan, Asia, America and Europe. The goal is to create a unified, cloud-based, rapid-response distribution system with the world’s largest components and production materials database. The anticipated success of this plan appears to explain both the rebound in the share price and relatively high current valuation, but with the China growth trajectory broken and the economic outlook uncertain, it may take longer and come with lower margins than originally expected.
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